Detailed Rationale

Crisil Ratings has removed its ratings on the bank facilities of Kokuyo Camlin Ltd (KCL) from 'Rating Watch with Developing Implications' and has reaffirmed the ratings at ‘Crisil A+/Crisil A1’ while assigning a ‘Stable’ outlook to its long-term rating.

 

Crisil Ratings placed the ratings on watch in November 26, 2024, following a corporate announcement by KCL on November 14, 2024, as per which KCL, following an internal assessment suo moto, had identified discrepancies between the inventory quantity recorded in the account books and the physical inventory at its Tarapur plant (in Maharashtra) valuing Rs 22.73 crore. The company had initiated a forensic audit through PricewaterhouseCoopers Pvt Ltd (PWC) to investigate the irregularities in the inventory management procedures.

 

The watch resolution follows the announcement by KCL on completion of the forensic audit undertaken by PWC for the period of April 2021 to September 2024, which confirmed the involvement of a few employees and job workers and recognised misstated entries and manipulation of records resulting in the financial impact estimated at Rs 21.44 crore. As per the discussion with the management, KCL is in the process of taking appropriate disciplinary actions against the individuals identified and will be working on the findings of the reports. Further, KCL has appointed an external Systems Applications and Products (SAP) consultant to strengthen controls and streamline its SAP processes; this should be completed over the next 4-5 months. The management has additionally confirmed the extent of the losses at Rs 21.44 crore, against which it has written-off inventory worth Rs 22.73 crore in the second quarter of fiscal 2025, and no further losses are to be reported going forward.

 

Revenue is estimated at Rs 562 crore for the first nine months of fiscal 2025, against Rs 604 crore for the same period last fiscal. Meanwhile, the operating margin declined to 3.7% from 9.0% owing to inventory loss of Rs 22.73 crore and increased raw material prices. The margin may improve in fiscal 2026, in lines with fiscal 2024 levels, at the back of continued benefits of cost-reduction techniques adopted amongst others measures; it remains a key monitorable.

 

The company is debt free (after prepayment of term debt in fiscal 2023) and uses cash accrual to fund its working capital requirement. Healthy gearing of ~0.2 time and above-average interest coverage ratio of over 18 times support its financial risk profile.

 

The ratings continue to reflect the established brand of KCL in the stationery industry in India, its improving profitability and healthy financial risk profile. The ratings also factor in the significant benefits derived from the business and financial linkages with the parent, Kokuyo & Co Ltd, Japan (Kokuyo). These strengths are partially offset by susceptibility to intense competition and volatility in input prices.

Analytical Approach

The ratings of KCL factor in the support expected from its parent, Kokuyo. Crisil Ratings believes KCL will, in case of exigency, receive distress support from the parent considering Kokuyo’s holding of 74.99% in KCL, as well as operational, technical and need-based financial backing.

Key Rating Drivers & Detailed Description

Strengths:

• Strong operational and financial support from the parent: Kokuyo is a leading player in the office stationery and furniture products industry in Japan, particularly in notebooks, office supplies and office furniture. Technical collaboration for new product development with the parent has widened the product offerings of KCL. Strong financial support from the parent is reflected in the rights issue of Rs 103 crore in fiscal 2014, primarily for expansion. Extensive experience of the parent as an established player in the stationery and office furniture market in Japan will continue to aid KCL’s growth.

 

• Strong brand in the stationery segment: The company’s brands, Camel and Camlin, have strong recall and presence of more than 77 years. It has a diversified portfolio of over 2,000 products and pan-India presence. The Kokuyo group sells a wide variety of stationery products such as pencils, geometry boxes and scholastic colours. Its strong distribution network of more than 300,000 retail outlets and over 2,500 stock keeping units aid sales growth. It has leading market position across its core product segments.

 

• Improving scale of operations while sustaining healthy operating margin: Despite intense competition, revenue registered a compound annual growth rate of 26% for the past three fiscals. The earnings before interest, taxes, depreciation, and amortisation margin improved in fiscals 2023 and 2024. While the margin stood lower at 3.7% during the first nine months of fiscal 2025, at the back of an inventory loss of Rs 22.73 crore, focus on cost-rationalisation measures and further strengthening of the export segment is expected to boost revenue and margin over the medium term.

 

• Healthy financial risk profile: Networth was healthy at Rs 294 crore as on March 31, 2024, while gearing is expected to sustain at around 0.2 time over the medium term in the absence of large, debt-funded capital expenditure (capex). Sustenance of profitability and return on capital employed will remain key monitorable.

 

Weaknesses:

• Susceptibility of operating margin to fluctuations in raw material prices: In the stationery industry, cost of production and profit margin depend heavily on raw material prices, which account for a major portion of the production cost. Prices of key materials, such as plastic, paper and pigments, have been volatile in the past few years and KCL is susceptible to fluctuations in these prices. However, on account of prudent management, operational efficiency and ability to partly pass on the prices to customers, the company’s operating margin improved to ~9.5% in fiscal 2024 from ~7% in fiscal 2023.

 

• Exposure to intense competition: The domestic stationery industry is highly fragmented with many unorganised players at the lower end of the product segments, such as pens, pencils and adhesives. While brands in the stationery domain are limited, the company faces intense competition from cheap, non-branded variants, and Chinese stationery.

Liquidity: Adequate

Liquidity is expected to remain adequate over the medium term, supported by projected cash accrual of Rs 40-50 crore per annum. Fund-based limit of Rs 167 crore was utilised at ~19% on average for the 12 months through January 2025. With nil debt obligation and expected capex of Rs 40 crore in fiscal 2025, along with sufficient cash accrual, KCL is unlikely to raise debt. Moreover, the parent will continue to provide ongoing and need-based support in case of exigencies.

Outlook: Stable

Crisil Ratings believes KCL will continue to benefit from its established market position and distribution network while maintaining comfortable financial risk profile over the medium term.

 

Rating sensitivity factors

Upward factors:

• Increase in revenue and stable operating margin at 11-12% on a consistent basis
• Improvement in the working capital cycle, resulting in reduced reliance on external debt to fund working capital requirement

 

Downward factors:

• Decline in revenue and operating margin dropping below 6% on a sustained basis, leading to lower-than-expected cash accrual
• Large, debt-funded capex or stretch in the working capital cycle

About the Company

KCL was set up in 1931 as Dandekar & Company by Mr Digambar Dandekar and Mr Govind Dandekar. The firm got reconstituted as a public-limited company in 1946 and was listed in 1988. KCL is one of India’s leading stationery and art products company. It designs, develops and manufactures a variety of stationery products at its plants in Tarapur and Patalganga in Maharashtra and Samba in Jammu. After a rights issue in fiscal 2014, Kokuyo’s stake went up to 70.66% from 50.74%. As on December 31, 2024, Kokuyo holds 74.99% stake in KCL

Any other information: Not Applicable